LONDON French debt looks set to come under pressure in the near future with investors battered by the Greek crisis arguing it is pricey and does not reflect France's growing indebtedness.
As a result, other euro zone paper, including Germany's and -- perhaps surprisingly -- Italy's, could be in for a filip.
The gist is not that France's economy is under any immediate Greece-like default stress, but the cost of its bonds -- and the cost of insuring them -- does not properly reflect what stress is actually there.
The French deficit is set to climb to 8.2 percent of gross domestic product this year, the highest for at least half a century. Its debt is projected to jump to 83.2 percent of GDP -- up 20 percentage points in just two years.
"France has been lumped as a core euro zone economy. To our mind the budgetary situation is not as good as the pricing suggests," said Richard Batty, an investment director at Britain's Standard Life Investments.
"It is being priced as though there isn't a budget problem," he said.
In it latest note, Batty's firm said it was being put off French debt because its fiscal problems and the true cost to euro zone economies of any bailout of peripheral economies are not fully priced in to its debt.
This echoes the view of a number of other fund managers and bank analysts.
Royal Bank of Canada, for example, has produced a "heat map" of sovereign risk, designed to gauge which of 21 developed global economies are under the most duress and why.
Despite being widely treated as a core euro zone economy, France ranked 6th out of the 21, coming in as less risky than only Ireland, Greece, Portugal, Britain and Italy.
Its 10-year bond yield, however, offers a relatively tight spread of only around 30 basis points over benchmark German Bunds.
The cost of insuring French debt through credit default swaps, meanwhile, is around 43,400 euros per 10 million euros of exposure, less than 10,000 euros more than for German debt and cheaper than The Netherlands, according to CMA DataVision.
All this is not just beginning to put off investors. It also has them looking to play what they expect will be a mispricing shift.
Fortis Investments, for example, is considering trades to cash in on what it expects will be a widening of French bond yield spreads over German ones.
Investment specialist Joost van Leenders says if the firm did make a move it would likely be through credit default swaps. French CDS costs would rise if investors began to treat France's economy as its numbers might suggest.
In the meantime, other euro zone countries might end up the beneficiary of any French sell off.
One of those would probably be Germany, which, as core of the core, would attract investors averse to much risk. German yields have come in about 25 basis points year-to-date, already widening spreads with others.
But investors have also begun to look at Italy for reasons that mirror their growing wariness about France -- to some, Italian bonds look cheap in relation to its economy.
Italy's bond spread over Bunds is more than 80 basis points and its CDS cost 101,500 euros per 10 million euros of exposure, nearly 2-1/2 times that of France.
Some investors, however, are making the case that the market is being over-gloomy about Italy. In the same note that it criticized France, for example, Standard Life Investments, cited Italy for its potential attractiveness.
The world's largest bond fund has also taken note. Andrew Bosomworth, executive vice president of PIMCO Europe, told Reuters that while there was a risk the French/German yield differential could increase, Italy appeared in better shape.
"Italian spreads are a lot wider. But the Italian government has been a lot more vigilant in keeping their deficit down than France," he said. "You get a higher spread and a reasonably strict discipline being exercised."
Not something you hear very often in relation to Italian economics.
(Editing by Toby Chopra)